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Price Discrimination and Social Welfare with Demand Uncertainty

Author

Listed:
  • Mahmudul Anam

    (York University, Canada)

  • Shin-Hwan Chiangy

    (York University, Canada)

Abstract

Price, output and welfare erects of third-degree price discrimination is analyzed in the context of a risk-averse monopolist, who commits to xed prices before the revelation of random and potentially correlated demands. Assuming the disturbance term to be additive, white noise and the monopolist to have a quadratic (mean-variance) utility function, we show that price discrimination may occur with identical expected demands, the relatively risky but price insensitive market may be charged the lower price and despite linear demands, aggregate expected output may fall while social welfare rises. All of these results, which run counter to those in the deterministic model, are shown to be driven by the asymmetry in the revenue and risk characteristics of the markets and the willingness of the monopolist to trade increased level for reduced risk of expected prot in a manner similar to portfolio choice with risky and correlated assets. Key Words: Monopoly (D42), Monopolization Strategies (L12), Decision Making under Risk and Uncertainty (D81)

Suggested Citation

  • Mahmudul Anam & Shin-Hwan Chiangy, 1999. "Price Discrimination and Social Welfare with Demand Uncertainty," Working Papers 1999_04, York University, Department of Economics.
    • Handle: RePEc:yca:wpaper:1999_04
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    File URL: http://dept.econ.yorku.ca/research/workingPapers/working_papers/pd.pdf
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    References listed on IDEAS

    as
    1. Schmalensee, Richard, 1981. "Output and Welfare Implications of Monopolistic Third-Degree Price Discrimination," American Economic Review, American Economic Association, vol. 71(1), pages 242-247, March.
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    3. Varian, Hal R., 1989. "Price discrimination," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 10, pages 597-654, Elsevier.
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    5. Stephen K. Layson, 1998. "Third‐Degree Price Discrimination With Interdependent Demands," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 511-524, December.
    6. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 2, number 2.
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    8. Layson, Stephen K, 1998. "Third-Degree Price Discrimination with Interdependent Demands," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 511-524, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    monopoly (d42); monopolization strategies (l12); decision making under risk and uncertainty (d81);
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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